Tag: Cronyism

Recently President-Elect Donald Trump intervened in the business of Carrier, an Indiana manufacturer of furnace and air conditioner units, by cajoling the Indiana government to offer the company $7 million in tax breaks to keep hundreds of jobs in the state rather than move that work to Mexico.

Trump’s Carrier deal is cronyist in nature, not capitalist. But what are the ways in which it is cronyist? Here I seek to cut through widespread confusion about this. I begin with a basic review of the key concepts, then discuss two main fallacies pertaining to cronyism. Continue reading “Crony Fallacies and Trump’s Carrier Deal”

Aurora’s efforts to facilitate the development of the Gaylord Rockies hotel illustrate the far-reaching influence of city politics on commercial development. The Colorado Springs Gazettereports, “The city of Aurora invented an incentive tool called an enhanced taxing area to levy higher admissions and lodging taxes, imposed a general improvement district with a 40-mill property tax levy, and declared agricultural land blighted to use urban renewal tax incentives.” In many cases development is now a matter of regional governments muscling landowners through threats of arbitrary “blight” designations and taxing different business owners at radically different rates to “manage” development.

I argue, “Beyond the basic role government properly plays in protecting individual rights, government should remain separated from churches as it should remain separated from corporations.” I outline four main ways to separate the government from economics: stop interfering with businesses, stop subsidizing them, stop taxing them, and respect the free-speech rights of corporate members.

I conclude:

Members of the “Occupy Wall Street” movement should be careful. If they logically think through their goal to “separate government from the corporations,” ultimately they will end up championing capitalism. And then they might decide that Pennsylvania Avenue offers a more appropriate center for a protest.

A story from today’s Denver Post illustrates the politicization of property in America: “The Aurora City Council on Monday voted unanimously to designate as ‘blighted’ 125 acres of vacant land near Denver International Airport.” The vote paves the way for Gaylord Entertainment to build a hotel without paying the same property taxes as everyone else.

Of course the “blight” designation is a complete fraud. By the same standards, most any property in Colorado could be declared “blighted.” And yet the statutes encourage local politicians to flagrantly lie for political gain.

When local politicians may arbitrarily declare property “blighted,” that gives them an trump on private property rights. True, all levels of government have substantially eroded property rights in America, but local governments have done perhaps the most damage.

The “blight” designation is tied into a discriminatory tax scheme. Under Colorado law, some taxpayers are more equal that others. If you run a long-established family business, you get screwed with the highest possible tax rates. If you are a flashy out-of-state (or out-of-country) corporation, you can finagle special tax breaks. Not only do discriminatory taxes violate basic standards of fairness and equality under the law, they promote bureaucratic ass-kissing as the standard method of conducting business.

Politicians ought not be in the “business” of violating private property rights or playing tax favorites. Instead, they should protect property rights for everyone, establish low, even taxes for all comers, and then let businesses succeed or fail on a free market.

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Geoff Granfield posted the following comment onJune 29, 2012 at 3:23 PM:
There is not a single policy I’ve heard of changing the tax code which wasn’t greeted with strong amount of resistance, establishing that issue among the most difficult difficulties struggling with United States now. It can be unfair, it doesn’t matter what facet on the controversy you land on. And while people in politics show they have kept our income taxes small federally, state government legislatures (from either side) have been acquiring unique methods to make up the reduction in revenue. Precisely how imaginative is your current state? http://www.tax-defense-network-tax-laws.com/tax-defense-network-top-10-silly-tax-laws

Political “economic development” harms the economy by diverting resources from more-valued to less-valued uses. Sure, it’s easy for politicians to point to the fancy shops and such resulting from politicized development, but, as Bastiat and Hazlitt warn, we must also pay attention to all the goods and services NOT produced because of the diverted resources.

Unfortunately, today development has less to do with anticipating and meeting the needs of consumers and more to do with sucking up to politicians and city bureaucrats. Those unable to gain the subsidies and special tax breaks — notably, older, established businesses — must compete on an unlevel playing field. Meanwhile, developers waste precious resources playing the political game that could otherwise go into valuable production.

The Denver Post recently reported, “The city of Westminster plans to demolish the blighted Westminster Mall to develop a downtown for the 100-year-old community. At a special meeting Monday, the City Council unanimously approved a deal to pay $22 million to Westminster Mall Co., a partnership between Kansas City, Mo.-based Dreiseszun & Morgan and Dillard’s.”

See my previous article on the city’s bogus declaration of blight. This issue isn’t about blight; it’s about the city playing games with taxpayer money to try to win back sales tax revenue from the Flatiron Mall in Broomfield.

As Brian Vande Krol notes, there are reasons to be skeptical of the city’s grand plans (though I have not personally verified all of his claims): “The Westminster Mall has received millions in taxpayer ‘investments’ over the years. It was once home to 300 shops. Then Westminster helped develop the Westminster Promenade, and then the Shops at Walnut Creek. Now Westminster Mall has 15 shops. The city is buying the mall, and you and I are once again ‘investing’ in the property. And the Promenade is losing tenants.”

The Promenade does host some empty shops, though it also has a number of apparently quite successful businesses. But I remember a few years back the Promenade featured a large, garish sign promising a city-assisted development of a new health center and related facilities at that location. I returned to the sight of the sign a couple days ago and found the following:

It is quite sad to walk through the Westminster Mall these days; most of the shops are closed down. The city, by taking a hostile stand against the mall’s owners while implying sweat deals for the right players, made unlikely any independent action regarding the property.

Maybe the tax-subsidized redevelopment will become as successful as the city hopes, and maybe it won’t. Either way, the city has no business gambling other people’s money on the project.

The more I hear of discriminatory tax schemes (such as what Scott Walkerpromoted in Wisconsin) the less I like them. While I do not favor repealing tax exemptions unless offset by general tax cuts, neither to I support implementing new discriminatory tax measures. Instead, advocates of economic liberty should advocate lower taxes for everybody, imposed in an equitable way.

I see four main problems with discriminatory taxes.

1. They’re not fair. Taxing two people in comparable situations different rates is just plain wrong. Moreover, they seem to blatantly violate the Fourteenth Amendment’s guarantee of an “equal protection of the laws.”

2. They involve politicians in social engineering. Politicians impose relatively harsher tax penalties on people and activities they don’t like, in order to impose less-harsh penalties on those they favor. But it’s simply not the proper job of politicians to pick winners and losers in the marketplace, or to play favorites.

3. Discriminatory taxes encourage individuals and business to squander resources vying for special tax privileges. This time and energy should be spent on productive work, not sucking up to politicians.

4. Discriminatory taxes skew people’s incentives. They direct more effort into tax-favored activities, and less effort into tax-punished activities. This necessarily shifts economic activity away from serving the highest needs and wants of customers.

In light of this general criticism, consider a new tax discrimination scheme proposed by Colorado Representative Cory Gardner, as described in a March 17 release:

Rep. Cory Gardner (R-CO) introduced a bill today that will help entrepreneurs and small business owners by allowing them to open tax deductable savings accounts under the condition that the money is used to start or grow a small business.

“Many small businesses are started in a garage with a dream and a credit card, and it’s time to lend these people a hand.” Gardner said. “If we’re serious about economic recovery and job creation then let’s look to ways that we can help small businesses, which create 2 out of every 3 new jobs.”

Details of Rep. Gardner’s proposal:

* Businesses with 500 or fewer employees will be eligible to open a savings account.

* Contributions to the account would be capped at $10,000 per year and the total value of these accounts at any one time would be capped at $150,000.

* As long as the money is used within five years of the first distribution, account holders do not have to worry about fees or penalties.

* Account holders could use the funds for the costs of business creation or expansion, such as the purchase of equipment or facilities, marketing, training, incorporation or accounting costs.

Consider the problems with this proposal:

* It favors new jobs over old jobs. Thus, it will promote ending stable, existing jobs in favor of “creating” new, more-speculative work.

* Who gets to decide which expenditures count as “growing a small business?” In actuality, every business expense is made with that outcome in mind. But, under the proposal, we’ll have some team of bureaucrats to decide what counts and what does not count as “business development” under the program. And so businesses will waste resources playing this political game.

* The proposal favors small businesses over large ones. But, again, it’s not the proper role of politicians to pick winners and losers or play favorites. It’s the proper job of politicians to protect property rights, including rights of contract. Let people in a voluntary market decide the proper sizes of business ventures.

If Corry wants to cut taxes for businesses, something I strongly favor, then he should just proclaim that openly and offer an across-the-board tax cut.

I have a hard enough time tracking Colorado politics; I spend very little time tracking the politics of other state. However, Wisconsin Governor Scott Walker has become the subject of national controversy because of his proposal to limit collective bargaining of political-sector unions.

At the pro-union rally in Denver February 22, I heard from a number of people who claimed that Walker’s tax cuts are responsible for the budget crisis there. Clearly that’s false: Walker’s tax cuts amount to something over $100 million, while the state faces a multi-year budget crunch of over three billion.

But this does raise the question of whether the tax cuts were a good idea. I see two problems with them.

First, as Russ Randall effectively argues in a new video, what matters is government spending, not tax rates. To me, putting the cart of tax cuts before the spending horse makes little sense.

If there is spending in the Wisconsin budget that should be cut — and I do not doubt that there is — then the straightforward thing to do is advocate those cuts.

I hasten to add that long-term tax restraints, such as Colorado’s Taxpayer’s Bill of Rights, serve to restrain year-to-year spending increases, so they address the spending side.

The larger problem with Walker’s tax cuts is that they are discriminatory. In general, it’s wrong to tax substantially similar parties different tax rates. Taxes should be applied evenly across the board. Indeed, it seems obvious to me that discriminatory taxes violate the “equal protection” guarantees of our Constitution. That said, eliminating discriminatory taxes should not become an excuse to raise net taxes; instead, the discriminatory taxes should be phased out in a revenue-neutral way (or in a way that reduces overall spending), to relieve the burden of other taxpayers. I’d rather see a discriminatory tax remain in place than see it eliminated in favor of increased spending (which is the strategy of Colorado Democrats).

The AP reports that Walker’s proposals offer tax cuts for “new” jobs — which means that existing jobs will be taxed more heavily. It’s wrong to political favor “new” jobs over established ones.

The Post Crescent reports that another of Walker’s proposals offers tax breaks to companies that relocate to Wisconsin. That punishes existing companies more heavily. If I were an established Wisconsin company, I’d be a little pissed that Walker gave tax advantages to my relocated competitors.

Politicians should not use tax policy to favor some companies and jobs over others. Taxes should be low and evenly applied. Discriminatory taxes should be phased out, not expanded, in a way that benefits the rest of the taxpayers. Walker should have promoted general tax cuts, along with the spending cuts required to balance the budget.

All that said, from what I can tell overall Walker has the interests of taxpayers in mind, which is a lot more than can be said for his many leftist critics, who generally argue as though a citizen’s money automatically belongs to the government for politicians to “redistribute” at will.

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Ari commented February 28, 2011 at 2:23 PM
I unintentionally deleted the following message from Paige. My quick response is that spending on government employees is paid by other working people. -Ari

Ari – If Gov. Walker has the interests of any tax payers in mind then it is that of businesses. He had cut taxes for companies and corporations not the working people. In fact, he wants the working people to take pay cuts in order to make up for the tax cuts he made.

Yes, you have heard several pro union people state that Gov. Walkers tax cuts are the reason for their deficit. The multi-billion dollar deficit you speak of is a PROJECTED deficit, the actual numbers right now reflect a deficit of only 138 million, which means that the 140 million dollars of tax cuts Walker approved definitely have something to do with the short falls.

The bottom line here is that he made those cuts, and the state of Wisconsin is facing a budget crisis HOWEVER the answer to this is not to force public employees, some of the hardest working people in the nation, to take cuts to their pay, health plans and pensions. Gov. Walker has said numerous times that this is the only way to fix the deficit.

If this is true that why doesn’t Gov. Walker conceed with the people. Public employees already agreed to take the cuts, they only want to keep their right to collectively bargain, which is a right given to every working person who cares to fight for it.

If Gov. Walker was concerned about the deficit as he says he is then he would have been happy to remove the collective bargaining piece of the bill.

The City of Westminster is so strapped for cash that it recently spent nearly $1.5 million for a demolished building and empty store.

City Edition, the tax-funded “news” paper published by the city, reports in its April/May 2010 edition:

The City of Westminster Economic Development Authority on January 27 acquired the vacant Macy’s store at the Westminster Mall property, the latest step in the city’s long-term strategy to revitalize the area.

Cost of the 157,000-square-foot building, which sits on 8.43 acres, was $700,000. WEDA has also acquired the former Trail Dust Steak House on the mall site for $727,103. The Trail Dust building torn down in early March [sic].

In today’s world of tax kickbacks and bureaucratic brown nosing, it is infeasible to redevelop a property without heavy involvement by local government. What Westminster should do to promote redevelopment instead is abolish its “economic development” agency, eliminate other wasteful expenses like its tax-funded “news” paper, stop wasting tax money on empty buildings, and lower taxes and controls across the board to encourage free enterprise.

Last year I wrote about how Westminster declared the mall blighted. Such a move can be a prelude to the use of eminent domain or “tax increment financing,” which essentially refunds property taxes. I do not know whether Westminster’s “economic development” agency intends to pursue either of those courses. (The Colorado legislature has tightened up eminent domain standards, which might have some impact in this case.)

Today Karen Groves wrote a fawning article about the city’s demolished building for the Denver Post’s “Your Hub.” She does add this interesting detail: “City Manager Brent McFall said the city is going through negotiations with its development partner, Steiner and Associates.”

The city’s payment of nearly $1.5 million for a demolished building and empty store seems remarkably like corporate welfare for Steiner and Associates. Because, in today’s controlled economy, there is simply no room for a free market.

I applaud John Andrews and Citizens for Responsible Aurora Government for opposing “tax increment financing” (TIF) for the development of ranchland in that area. (Westminster might be looking at a similar mechanism to fund the now-“blighted” Westminster Mall; I’m not sure where that project has headed.) However, I caution free market advocates to carefully distinguish between outright subsidies and discriminatory taxation. It is unclear to me based on the information from Andrews whether the Aurora case involves both or only the latter.

I have not taken a deep look at how TIF works in Colorado. My understanding is that TIF essentially redirects some of a plot’s property taxes back to the development costs of that plot. This is the equivalent of a property tax reduction for that plot. Sometimes, the property tax of surrounding “blighted” properties can also be funneled into that redevelopment; I’m not sure whether that’s the case in Aurora. (Redirecting the property taxes of some plots to the owners of others is definitely a subsidy.)

Insofar as the TIF scheme involves only a plot’s own property taxes, the TIF should be considered a discriminatory tax, not a subsidy. A subsidy is the forced redistribution of tax funds from one party to another. A discriminatory tax taxes different parties different rates based on political considerations.

If a TIF scheme results in raising tax rates on other people in an area to pay for city services, that is still a discriminatory tax, not a subsidy.

In general, I am opposed to any policy that increases discriminatory taxation. It’s just not fair for governmental bodies to screw some citizens harder than others. It also makes for bad politics, as those with political connections get special tax breaks, while those without connections get screwed (worse).

However, I am NOT in favor of doing away with existing discriminatory taxation when that means raising net tax collections. If a mugger steals $10 from Abe and $20 from Ben every week, the situation is not improved if the mugger starts stealing $20 from Abe as well. Instead, I favor converting discriminatory taxes to equitable ones only when it results in the same (or less) total revenues, meaning some people will pay lower taxes.

A discriminatory tax involves taxing comparable parties different rates. I am not including taxes that treat basically different parties differently. For example, a progressive tax taxes the wealthy a higher percentage, but this applies universally. If you are wealthy and then you become poor, your tax rate will automatically drop. Likewise, when Colorado charges a sales tax on a purchase from a Colorado retailer but not from a Washington retailer, that is not discriminatory in the vicious sense, because federalism is incompatible with interstate taxation.

Having made that caveat, I am prepared to declare that discriminatory taxation is bad, and the proper remedy is to equalize tax rates such that total revenues stay the same or drops.

Remember that a “tax incentive” for some means the same thing as screwing everybody else relatively harder. It seems likely that this particular race track may have won out without political interference, but, increasingly, we’ll never know whether a business succeeded because it’s a good business or because it’s a politically connected one.

This business-by-tax-engineering is repulsive. (But not to its “bipartisan” supporters.)